Arnold Kling  

The Euro

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Paul Krugman writes a pre-mortem.


You still hear people talking about the global economic crisis of 2008 as if it were something made in America. But Europe deserves equal billing. This was, if you like, a North Atlantic crisis, with not much to choose between the messes of the Old World and the New. We had our subprime borrowers, who either chose to take on or were misled into taking on mortgages too big for their incomes; they had their peripheral economies, which similarly borrowed much more than they could really afford to pay back. In both cases, real estate bubbles temporarily masked the underlying unsustainability of the borrowing: as long as housing prices kept rising, borrowers could always pay back previous loans with more money borrowed against their properties. Sooner or later, however, the music would stop. Both sides of the Atlantic were accidents waiting to happen.

Read the whole thing. It appears to have come from Krugman in the mid-1990's, not the evil twin columnist. In the end, he lays out four scenarios. I prefer "debt restructuring" to "revived Europeanism." Otherwise, there is not much for me to disagree with here.


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COMMENTS (8 to date)
Steve Sailer writes:

Something not mentioned in Krugman's surprisingly calm article, but implied by it, is how much better off Turkey is that it hasn't been allowed into the EU.

When I was in Bodrum, Turkey in 2009 at Hans-Hermann Hoppe's Property and Freedom symposium, people would point at the Greek island of Kos three miles away and say, "There's Greece, you should go visit Greece." I'd ask, "What's Kos like?" "A lot like here, just much more expensive because they use the Euro instead of the Turkish lira."

Not surprisingly, I never got around to visiting Greece.

Patrick R. Sullivan writes:

Gee, at times he almost sounds like Stan Liebowitz. Of course, he didn't bother to admit that Milton Friedman predicted almost exactly this outcome from the Euro at the first recession.

Also, he might want to think about the implications here:

Meanwhile, as unemployment soared, so did the cost of unemployment benefits — remember, these are European welfare states, which have much more extensive programs to shield their citizens from misfortune than we do.

Which is another insight Friddman had; attempts to alleviate suffering can bring even greater suffering by delaying timely adjustments to small problems.

Salem writes:
Something not mentioned in Krugman's surprisingly calm article, but implied by it, is how much better off Turkey is that it hasn't been allowed into the EU.
EU membership would be great for Turkey. The eurozone is the problem, not the EU.

What I didn't like about his article is that it (all too typically) conflated wildly different situations into one "European model." It is precisely the lack of similarity that has caused so much trouble for the project. If there were fundamental similarity, then a single monetary policy (even without transfer payments) would not be nearly so problematic.

I don't think any of Krugman's outcomes are particularly probable. The eurozone won't be allowed to collapse, but nor will formal transfer mechanisms be created - these are the two great political impossibilities. What is much more likely is that there will continue to be ad hoc solutions. If "toughing it out" proves impossible, as Krugman suggests, there will simply be one-off subsidies to keep the weaker countries within the eurozone. Yes, that means that the crisis of 2010 could reoccur indefinitely, but no-one ever said the EU was well-run.

James A. Donald writes:


The most conspicuous thing about the Euro crisis is, as Krugman tells us, the Irish crisis.

And the most conspicuous thing about the Irish crisis, which Krugman blithely overlooks, is that the Irish government chose to not only bail out the people the banks owed money to, but also the bank's management and shareholders. They made the shareholders whole.

Bailing out creditors creates moral hazard, since creditors will lend recklessly. Bailing out shareholders is really going overboard in creating massive moral hazard.

One can argue that bailing out creditors is necessary to maintain financial stability and the resulting liquidity. What is the rationale for bailing out shareholders?

Bailing out the shareholders is egregious and extraordinary - it suggests that what the banks were doing, they were doing at the government's behest. Or perhaps the government is in the bankers pocket, in the classic evil Jewish conspiracy model, except that Irish bankers are not Jewish.

Krugman is arguing for a bailout - but a European bailout is a bailout of crony capitalism and corruption. Krugman is not only arguing that the thrifty should bail out the improvident. He is also arguing that the honest should bail out the corrupt.

[comment edited--Econlib Ed.]

Steve Sailer writes:

Re: Crony capitalism involving Ireland's banks and government

Fortunately, here in the U.S., President Obama just hired William Daley, brother of two Chicago mayors, away from JP Morgan Chase to be his chief-of-staff.

So, we don't have to worry about anything like that here.

Todd Fletcher writes:

Maybe the column is "calm" because Krugman is trying to rejoin the human race after his disgraceful columns earlier in the week.

Thomas Boyle writes:

It's tough to argue that there was any need to bail out Irish bank bondholders either. It's a very small country (population about 4.5 million, roughly the size of San Diego county): in an integrated EU, its borrowing needs could easily have been met by non-Irish European banks, even if local credit had dried up entirely. Krugman's real point here is that Europe should be fiscally integrated, i.e., that tax rates should be dictated by France & Germany. The low corporate tax rates (and high growth rates) at the European periphery are a sore point for European socialists (despite the fact that its government is insolvent as a result of the guarantees, Ireland's per-capita GDP remains very high). Of course, low tax rates in high-growth states (and low growth in high-tax states) are a sore point for US socialists as well...

Tom Grey writes:

Krugman's 4 possibilities are not so creative.
"revived Europeanism" will stop when some German party decides to run on a program of "return to the Deutschemark!", and rapidly becomes the majority party.


Instead, the national economies should all be printing 1-year, 0% Bearer Bonds, which the gov't promises to accept immediately in tax payments at full par value. (Greece, Ireland, Portugal; Slovakia, even CA & NY states)

And the gov't should pay its bills with Bonds instead of Euros. No need to borrow from foreign investors, saves on interest; no devaluation of goods, but with those receiving bonds instead of Euros possibly losing a bit over the year.
In the first year, those recipients might not lose anything.

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